Payday lenders' access to bank accounts should be restricted, says …

Lord Freud, who told a fringe meeting at the Conservative party’s annual conference that he has grown increasingly concerned by the way in which high-interest lenders use continuous payment authorities o access borrowers’ accounts. Photograph: Peter Macdiarmid/Getty Images

Payday lenders should be prevented from draining money direct from the bank accounts of benefit claimants until vital household bills have been paid, the minister for welfare reform has said.

Lord Freud told a fringe meeting at the Conservative party’s annual conference that he had grown increasingly concerned by the way in which high interest lenders used continuous payment authorities (CPAs) to access borrowers’ accounts.

As a result, the Tory peer has asked civil servants to come up with ways of restricting lenders’ access to accounts of benefit claimants until utility bills and rent have been accounted for.

His intervention is the first acknowledgement by a minister of a major problem with CPAs implemented by payday lenders. But it was described by Stella Creasy, the campaigning Labour MP for Walthamstow, as an inadequate response.

Under CPAs money is often taken from bank accounts without permission or warning and sometimes even after loans have been paid off, according to evidence gathered by the charity Citizens Advice.

Many lenders make use of them if borrowers are late with payments. Campaigners have argued that such actions are unscrupulous and leave vulnerable people unable to pay for food, rent or other basic necessities.

Addressing a Salvation Army fringe meeting, Freud said the need to curb payday lenders had become more urgent because of the impending rollout of universal credit.

“You sign one of these CPAs and the payday lender dries your account the next day; the next day you are late, you pay the penalty, you can be overcharged, whatever.

“You can see your bank account raided and that clearly that is completely antithetical to what we are trying to do with universal credit. We are trying to create a safe bank account system so [claimants] can have a direct debit and pay their rent and their utility bills.

“This has got a lot of my attention … that is something we cannot allow to go on happening,” he said.

Asked by the Guardian to clarify his options to stop the use of CPAs, he said: “We are looking at a reasonably wide range of options. Our determination is that we don’t have a situation in which universal credit recipients can see their money taken away just before they pay key bills. The options we are looking at are ways of preventing that,” he said.

Creasy said that minister’s intervention was a welcome acknowledgement by the government that there was a problem but said she was concerned that he would fail to address the central issue of debt and high interest exploitation.

“While we should welcome that a minister is admitting that legal loan sharks are a problem, he needs to bring in proper regulation,” she said. “If he really wants to stop this enormous problem then he should set a total costs cap rather than come to a gentlemen’s agreement. This is also an admission by the government they cannot get people to go to credit unions.”

Last month, Citizens Advice said one in three complaints it received about payday loans were about the use of CPAs. The charity has seen evidence of money being taken without permission or warning, and sometimes after loans had been paid off.

Critics have pointed out that Wonga, the payday lender which has charged up to 4,215% APR on its loans, is a major Tory donor.